Interesting column from Reuters’s Agnes Crane, “U.S. housing has added problem: mortgage insurance.” Why interesting? Because the trouble she describes hits right in the issue of down payments — specifically, the idea of a 20 percent-down requirement for the best rates.
Here’s the gist: Mortgage insurers such as PMI made their billions by selling policies to lenders. If a borrower couldn’t put 20 percent down, he’d have to buy mortgage insurance in case he defaulted. Thus, lenders were protected.
Well, a lot of people didn’t put 20 percent — or, frankly, anything — down during the housing boom/bubble. They paid a bit for mortgage insurance and all was well. But insurers make money because the odds are way in their favor. That’s what actuaries do: figure the odds and make sure the house — i.e., the insurer — always wins in the big picture.
Then came the crash, and suddenly lenders realized that they had given loans to people who really couldn’t afford them. Borrowers defaulted. Lenders turned to their mortgage insurance companies by the truckload.
Suddenly the odds were against the house, big time. Mortgage insurers had to pay out, and pay out, and pay out.
And now they’re in trouble. PMI Group had its mortgage insurance unit seized by the state of Arizona last week. And the other major policy writers are in trouble.
As Crane writes,
Only one of the six major home loan insurers has an investment-grade credit rating. A few are dangerously close to breaching their risk-to-capital limit of 25 to 1 – the minimum required to ensure they have enough firepower to pay claims.
So what might happen if mortgage insurance becomes harder to get, or prohibitively expensive? Might down-payment requirements go up? Might 20 percent become the norm? And what would that do for sales?
In other words, it’s an issue worth watching. Which is what we’ll be doing.